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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to .
Commission file number: 0-27596
CONCEPTUS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 97-3170244
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
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1021 HOWARD AVENUE
SAN CARLOS, CA 94070
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 802-7240
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.003 PAR VALUE PER SHARE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _/X/
_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market on February 28, 1997 was approximately $77,866.583 as
of such date. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
There were 9,227,613 shares of Registrant's Common Stock issued and
outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Conceptus, Inc. ("Conceptus" or the "Company") designs, develops and markets
minimally invasive devices for reproductive medical applications. The Company's
initial focus is on improving the diagnosis and treatment of fallopian tube
diseases and disorders, primary causes of infertility, and on providing a
non-surgical approach to fallopian tube sterilization, the most commonly
performed contraceptive procedure worldwide. Conceptus has developed proprietary
micro-catheter and guidewire systems that allow physicians to transcervically
(through the cervix) access and navigate the full length of the fallopian tubes
in a nonsurgical approach. The Company believes that its fallopian tube access
systems will facilitate more rapid and accurate diagnosis of fallopian tube
diseases and disorders than conventional diagnostic methods, which are known to
be inaccurate, leading to more appropriate selection of therapies, and
ultimately, improved reproductive outcomes. The Company also believes that its
systems will allow many tubal therapies for both infertility and permanent
contraception that are currently performed surgically to be performed
transcervically, thereby reducing the cost, trauma and recovery time associated
with those therapies. The Company's systems are based on technology initially
developed by Target Therapeutics, Inc. ("Target") and licensed exclusively to
Conceptus in the field of reproductive physiology. Conceptus commenced marketing
of its catheter systems internationally for a number of applications in
September 1995 and, to date, has received six 510(k) clearances to market
applications of its T-TAC-TM- (Transcervical Tubal Access Catheter) systems, one
510(k) clearance for falloposcopy for proximal tubal occlusion ("PTO") and one
510(k) clearance for resectoscopy in the United States.
Human reproductive diseases and disorders are increasingly common medical
problems in most developed countries. Infertility is one of the most common and
emotionally traumatic of reproductive disorders. In most countries, female
infertility appears to be increasing, both because of the increase in diseases
which damage the fallopian tubes, such as sexually transmitted diseases, and
because of the increasing tendency of women to defer childbearing until later in
life, when fertility begins to decline naturally. Studies indicate that five to
eight million couples in the United States (or up to 15% of couples of
child-bearing age (20-44)) are clinically infertile, and many studies indicate
that increasing numbers of patients are seeking medical treatment for
infertility. Fallopian tube infertility disorders are estimated to affect 35% of
the couples seeking treatment. It is currently estimated that annual
expenditures in the United States for the diagnosis and treatment of infertility
exceed $2 billion.
Conceptus is developing a broad range of procedure-specific systems based on
its platform transcervical tubal access technology. The Company's T-TAC system
assists physicians in accessing and navigating the fallopian tubes and is
designed to facilitate more accurate detection, and improved treatment, of tubal
disorders. The Company received five 510(k) clearances of its T-TAC system in
1995 and commenced marketing of the system for diagnosis of PTO in the United
States. Internationally, the Company is marketing its T-TAC system for diagnosis
of PTO, and for an additional therapeutic application, tubal recanalization.
Published journal articles have shown that fallopian tube catheter
recanalization, when performed on patients previously diagnosed with PTO,
results in an average pregnancy rate that is more than twice that of a single
cycle of IN VITRO fertilization ("IVF").
The Conceptus STARRT-TM- (Selective Tubal Assessment to Refine Reproductive
Therapy) Falloposcopy system combines the Company's proprietary micro-catheter
and guidewire tubal access technology with a specialized fallopian tube
microendoscope. This system permits direct visual examination of fallopian tube
endoluminal pathology for the first time without the need for surgery. The
Company's system has been used in over 375 patients in the International
Multicenter Study of Falloposcopy ("IMSF"). In February 1997, the Company
received United States Food and Drug Administration ("FDA") clearance to market
its STARRT Falloposcopy system for diagnosis of proximal tubal occlusion.
Conceptus plans to develop a complete product line based on the STARRT
technology, including
2
expanded diagnostic indications for the system and products for
endoscopically-guided tubal therapies. The Company believes that its STARRT
Falloposcopy system will allow physicians to make more informed and accurate
diagnoses of tubal functionality than current approaches, leading to the
selection of more effective courses of therapy.
Conceptus is also developing its S/TOP-TM- (Selective Tubal Occlusion
Procedure) system to provide a nonsurgical approach to fallopian tube
sterilization, the most common method of contraception worldwide. Due to the
limitations of other methods of contraception, almost half of the married women
in the United States age 35 or older have undergone a surgical fallopian tube
sterilization (tubal ligation), and, worldwide, surgical fallopian tube
sterilization is the most common contraceptive procedure among women who have
completed their families. The Company estimates that over 5,000,000 procedures
are performed annually worldwide. The S/TOP system utilizes the Company's
transcervical tubal access technology to deliver a proprietary micro-coil device
to the lumen of the fallopian tube. Conceptus believes that the
S/TOP system will allow physicians to perform fallopian tube sterilization in an
office setting without general anesthesia. The Company also believes that the
elimination of the requirement of surgery to perform the procedure will increase
both patient demand for the procedure and the availability of tubal
sterilization in developing countries, where surgical facilities may be limited.
The United States accounts for less than 20% of annual worldwide fallopian tube
sterilization procedures, and the Company estimates that the United States
market for such procedures exceeds $1.5 billion annually. Conceptus recently
successfully completed the initial part of a Phase I clinical study of its S/TOP
system and has received FDA clearance to begin the second part of the Phase I
study.
On November 26, 1996, Conceptus acquired Microgyn, Inc. ("Microgyn"), a
private medical device company, for $3 million paid upon the date of acquisition
and $1 million payable six months after the date of acquisition. The $1 million
is payable, at the option of the Company, in either cash or stock. Additional
contingent consideration (cash or stock) is payable to the shareholders of
Microgyn based upon the meeting of certain future milestones.
Microgyn is focused on developing products to increase the safety and
performance of resectoscope procedures, including therapeutic hysteroscopy
procedures, which utilize an endoscope to guide the selective excision of
abnormal uterine tissue. These procedures, including endometrial or fibroid
resection and endometrial ablation, are growing in clinical acceptance because
they are less invasive, non-incisional alternatives to the over 600,000
hysterectomies performed in the United States annually. Microgyn's first
product, the Resectosope Safety Sheath, is part of a system of products designed
to permit the use of isotonic, or physiologic, fluids during theraupeutic
hysteroscopic procedures. Currently, these procedures require the use of
hypotonic fluids, the absorption of which can lead to a number of clinical
complications, including death. Conceptus plans to file a 510(k) submission with
FDA for marketing clearance of the device in therapeutic hysteroscopy and has
received FDA clearance for urological use of the device. Conceptus plans to
pursue marketing the urology application of the Resectoscope Safety Sheath
device for use in transurethral resection through appropriate distribution
arrangements.
The Company's goal is to become a global leader in reproductive healthcare
with an initial focus on women's reproductive health. The Company is directing
its marketing efforts, both domestically and internationally, toward those
interventional gynecologists who maintain high volume practices in infertility,
pre- and peri-menopausal conditions and gynecological endoscopy. Conceptus
intends to expand its product development and marketing efforts to address new
clinical applications in reproductive physiology, such as assisted reproductive
techniques and male reproductive disorders, in which the Company's technologies
may satisfy clinical needs or achieve cost reductions. In addition, the Microgyn
products have urologic applications and the Company intends to address this
market through appropriate partnership or distribution arrangements.
Conceptus has an exclusive, worldwide, royalty-free license to the
reproductive applications of technology developed by Target Therapeutics, Inc.,
a manufacturer of minimally invasive medical devices
3
for neurovascular applications. Conceptus was formed in 1992 in response to
reports by physicians of the successful use of Target's products to access the
fallopian tubes. Target owns approximately 15% of the Company's Common Stock. In
addition, Target currently has a representative on the Company's Board of
Directors, as it has since the Company's inception. Accordingly, Target may be
able to exercise influence over the business and financial affairs of the
Company. On January 20, 1997, Target and Boston Scientific Corporation ("BSC")
announced the signing of a definitive agreement to merge in a tax-free
stock-for-stock transaction. Target will become a separate business unit of BSC.
The merger is expected to close during the second calendar quarter of 1997.
HUMAN REPRODUCTION
Human reproduction has been the focus of increased scientific and medical
attention over the last twenty years. Contemporary lifestyle choices, such as
deferred childbearing, have led to an increased demand for certain reproductive
medical services, including the treatment of infertility and improved methods of
contraception. As a result, increasing numbers of OB/GYN specialists in the
United States treat infertility as well as other reproductive disorders, and the
number of family planning/reproductive health units in community hospitals in
the United States increased by over 300% between 1985 and 1991. Increasing
attention has been focused on the study of the fallopian tubes because of their
importance in the reproductive process, both in fertility and contraception. The
fallopian tubes are now recognized as not just a passive conduit between the
uterus and the ovaries, but as an essential organ in the reproductive process.
ROLE OF THE FALLOPIAN TUBES IN REPRODUCTION
The fallopian tubes are the organs in which conception occurs and thus, at
least one fallopian tube must be open to permit the passage of sperm. The
finger-like ciliated cells that line the tubal lumen must be healthy in order to
assist sperm in their migration toward the ovum, and, if conception occurs, to
reverse the direction of movement to propel the newly-fertilized ovum toward the
uterus. In addition, the tubal secretory cells must be functioning to create the
chemical environment necessary to achieve fertilization. The fallopian tubes
serve a critical function in the reproductive process and are often the focus of
treatment when the objective is either to increase a woman's reproductive
potential, such as in the treatment of infertility, or to decrease her
reproductive potential, such as in the performance of sterilization procedures.
The fallopian tubes are very narrow and tortuous, convoluted in shape, with
many folds, and are delicate and difficult to access. As a result, they do not
lend themselves to easy study and treatment. Because of the difficulty in
accessing the fallopian tubes, current non-surgical techniques for diagnosing
fallopian tube diseases and disorders often do not adequately or accurately
delineate the nature, extent and location of tubal pathology. Therapeutic
choices for the treatment of infertility are equally constrained by the
difficulty in accessing the fallopian tubes, and therefore, most fallopian tube
therapies must be performed surgically. In addition, although mechanical
occlusion of the fallopian tubes is a highly effective means of achieving female
sterilization, the difficulty in accessing the fallopian tubes has made it
necessary to perform surgery in order to accomplish fallopian tube
sterilization.
INFERTILITY OVERVIEW
Infertility is one of the most common and emotionally traumatic of
reproductive disorders. The incidence of infertility appears to be increasing in
most developed countries due to both sociological and epidemiological factors.
Women in developed countries are increasingly deferring childbearing and studies
indicate that a 35-year old woman is almost three times as likely to be
infertile as a woman of 25. Studies also indicate that five to eight million
couples in the United States (or up to 15% of couples of childbearing age
(20-44)) are clinically infertile, which has been defined as the failure to
conceive after one year of
4
unprotected intercourse. Although the numbers of couples seeking treatment have
been steadily increasing, according to a study by the National Center for Health
Statistics (the "NCHS Study"), in 1988 only 1.4 million couples sought treatment
for infertility. The Company believes that the remaining couples did not seek
medical treatment due to the cost, trauma and poor outcomes associated with
current diagnostic and therapeutic infertility options. Despite the low
percentage of infertile couples who seek care, current estimates of the United
States market for diagnosis and treatment of infertility are in excess of $2
billion annually.
The cause of a couple's infertility is often very difficult to identify.
Frequently, both male and female factors exist in a couple having difficulty
conceiving. In addition, both hormonal and physical factors, such as fallopian
tube disorders or testicular abnormalities, commonly play a role. Finally, the
limitations of current diagnostic techniques often result in the underdiagnosis
and misdiagnosis of certain infertility factors. As a result, infertile couples
typically undergo a series of diagnostic evaluations to isolate the most
probable cause of their infertility.
Many factors that contribute to infertility, such as ovulatory disorders and
certain male factors, are well understood. However, fallopian tube diseases and
disorders, which are major causes of female infertility, remain poorly diagnosed
and treated today due to the difficulty in accessing the fallopian tubes in
order to perform diagnostic and therapeutic procedures. Despite both the
difficulty in diagnosing fallopian tube disorders and the limited number of
couples seeking infertility treatment, the Company estimates that over 490,000
couples each year (over one-third of those couples who seek infertility medical
care) are diagnosed with a fallopian tube factor as the sole or contributing
cause of infertility. This suggests that of the up to 8 million couples
experiencing infertility in the United States, fallopian tube infertility may
affect as many as 2.8 million. The Company believes the actual incidence of
fallopian tube infertility may be even higher than 2.8 million women, both
because the rate of diagnosis of tubal factors was established by current
diagnostic techniques, which are known to be inaccurate, and because of the
increasing incidence of diseases which can profoundly damage the fallopian
tubes, such as sexually transmitted diseases and other pelvic inflammatory
diseases.
The fallopian tubes are also very vulnerable to disease, especially to the
microorganisms that cause inflammatory diseases, such as chlamydia and
tuberculosis, which are reaching near epidemic levels in the United States.
Studies indicate that for each episode of pelvic inflammatory disease, there is
at least a 10% chance of subsequent infertility, irrespective of the type of
microorganism causing the infection. The fibrotic lesions, or scar tissue, that
can occur in the fallopian tubes as a consequence of infection, can cause
infertility by damaging several important tubal functions, including transport
of the egg and sperm and regulation of the chemical environment for conception.
These fibrotic lesions can also completely occlude the tubal lumen preventing
the passage of sperm to achieve fertilization.
Fallopian tubes are also often occluded by the natural build up of cellular
debris and mucous. This type of occlusion is often misdiagnosed as pathological
(a "false-positive" diagnosis) and may lead to inappropriate invasive
therapeutic interventions such as tubal surgery. As a result, due to the
inaccuracy of current, non-surgical tubal diagnostic methods, many physicians
have resorted to surgical approaches to diagnose tubal diseases and disorders.
CONTRACEPTION OVERVIEW
Throughout the world, there is a need for a safe, nonsurgical, permanent
contraceptive method. In the United States, approximately 46% of married women
over 35 years of age have undergone surgical fallopian tube sterilization (tubal
ligation) in part due to concerns about the safety and reliability of those
birth control methods they readily accepted at an earlier age. Consequently,
despite recent favorable clinical study data, patient concerns about the
long-term effects of oral contraceptives have limited their acceptance among
women over 40 in the United States, where only 3% of women age 40-44 use oral
contraceptives. Use of intrauterine devices ("IUD") in the United States has
declined in women of all age
5
groups. Due to concerns that use of IUDs results in increased incidence of pain
and heavy menstrual bleeding which could mask the symptoms of serious uterine
disease, use of IUDs among women in the United States age 40-44 is only 4%. For
these reasons, women are seeking new methods of permanent contraception.
Increasingly, women are turning to surgical tubal sterilization, representing
the contraceptive method of choice in 51% of women age 40-44 in the United
States. In developing countries, where there are concerns about population
growth, 23% of all women have undergone surgical tubal sterilization.
LIMITATIONS OF CURRENT APPROACHES TO FALLOPIAN TUBE INFERTILITY AND TUBAL
STERILIZATION
DIAGNOSTIC APPROACHES TO TUBAL INFERTILITY
The physician attempting to diagnose female infertility will nearly always
order or perform a procedure to determine whether the fallopian tubes are patent
(open) or occluded. The current diagnostic procedure of choice is
hysterosalpingography ("HSG"), which involves the injection of an x-ray contrast
medium (or dye) transcervically into the uterus to allow the physician to
observe and evaluate the flow of dye through the fallopian tubes under
fluoroscopy (x-ray). This procedure is often painful and is also known to be
highly inaccurate, with false-positive results in as many as 40% of
HSG-diagnosed cases of proximal tubal occlusion ("PTO"). Various factors are
believed to be responsible for these false indications of tubal occlusion,
including tubal spasm (a natural function of the tubes) and a build-up in the
tube of natural cellular debris and mucous. The Company estimates that HSG is
performed 600,000 times annually in the United States, and costs approximately
$100-$300 per procedure, half of which is typically reimbursed.
Because of its high rate of inaccuracy, when HSG indicates PTO, the
physician will likely perform a surgical confirmatory procedure, laparoscopic
chromopertubation (commonly called "lap and dye"). This procedure is similar to
HSG, but involves transcervical injection of a colored dye, the flow of which
through the fallopian tubes is observed through an endoscope surgically
positioned in the abdomen. This procedure has a lower, but still unacceptably
high, rate (20-40%) of false-positive diagnosis of PTO, and also involves the
potential complications associated with the more invasive laparoscopic surgical
procedure. In any event, HSG and lap and dye are used primarily to determine
whether the tube is patent or occluded and not whether any other tubal function
is impaired. Lap and dye is performed an estimated 280,000 times annually in the
United States, and typically costs in excess of $2,000 per procedure. Most
insurers will reimburse a single diagnostic laparoscopy procedure per patient.
Because of the inability to access the fallopian tubes easily and
non-surgically in order to effect an accurate diagnosis of tubal health, it is
often difficult for physicians to select the most appropriate therapeutic option
for each patient. The difficulties in accessing the fallopian tubes also result
in current therapies for tubal infertility being far more invasive than
necessary.
THERAPEUTIC APPROACHES TO TUBAL INFERTILITY
Many patients with tubal infertility can be treated effectively with
corrective tubal surgery. However, pregnancy rates vary because of the
limitations of current tubal diagnostic techniques, which make it extremely
difficult to identify the patients for whom tubal surgery is appropriate
therapy. Thus, many patients undergo surgery whereupon either no pathology is
found or the tubes are so diffusely diseased as to preclude surgical repair.
Conversely, in many cases, other less appropriate therapies are often prescribed
for patients for whom surgery would be the optimal approach.
Because of the invasiveness of tubal surgery, which generally involves
either laparotomy, an open, abdominal surgery requiring general anesthesia and
multi-week recovery, or endoscopic surgery using a laparoscope, tubal surgery
should be restricted to those patients who can benefit from it. Both types of
surgery involve the risk of infection and the risks associated with use of
general anesthesia. In addition, the surgical procedure itself often leads to
collateral damage to the fallopian tube, usually in the form of post-surgical
adhesions, which may further decrease the patient's chances of conception. In
either an open or
6
laparoscopic surgery, a direct view of the fallopian tube lumen should allow for
an accurate diagnosis of the nature, location and extent of tubal disease,
enabling the physician to choose the appropriate therapy, if treatment is
indicated. However, peer review journal articles indicate that the pregnancy
rate subsequent to tubal surgery is only 30-35% and further suggest that
outcomes could be improved substantially if better diagnostic procedures were
available to identify appropriate surgical candidates and to determine the type
and extent of surgery required. Although most insurers will reimburse a single
tubal surgical procedure for a patient, due to disappointing surgical outcomes,
the frequency of tubal surgery in the United States has declined over the last
ten years, and the Company estimates that the procedure is currently performed
20,000 times annually. A procedure typically costs between $2,000-$10,000,
depending on the degree of invasiveness.
In the United States, tubal infertility patients are increasingly being
referred to assisted reproductive techniques, primarily IVF. As with tubal
surgery, IVF is optimal therapy for certain tubal infertility patients,
particularly when both fallopian tubes are severely damaged or missing, or when
a combination of infertility factors in a couple makes it impractical to attempt
to correct each cause. IVF typically involves hyperovulation induced by
fertility drugs, and the harvesting of multiple eggs by way of a needle
aspiration through the abdominal wall directly to the ovary. Semen from the male
partner is then combined with the harvested eggs in a laboratory test-tube
fertilization procedure. Generally, after up to 72 hours, several embryos are
transferred by a transcervical catheter into the uterus for implantation.
The limitations of IVF have been well documented. Recent studies question
the safety of high dosages of fertility drugs. These drugs are generally
self-administered intramuscularly, which is not only painful, but often has a
powerful impact on emotional well-being. The IVF procedure is costly, with a
single harvest and transfer (a "cycle") costing up to $10,000 in the United
States. Many patients undergo multiple cycles in a course of therapy increasing
the cost to an amount up to $50,000 for a complete course of therapy, and IVF is
rarely reimbursed. In addition to the high cost of treatment, due to the
increased incidence of multiple births and delivery complications that can
accompany IVF, the total overall cost of IVF therapy can be substantial.
Finally, the success rate of IVF is disappointing, reported to be 19% live
births per cycle in the latest survey of the Society for Assisted Reproductive
Techniques (the "SART"). As a consequence of the emotional and physical trauma,
drug risks, and the high cost associated with IVF, fewer than 35,000 procedures
were performed in the United States in 1993.
The inability to access the fallopian tubes non-surgically has also
constrained the acceptance of the gamete intrafallopian transfer ("GIFT")
procedure, another assisted reproductive technique. This procedure is more like
natural conception because fertilization occurs in the fallopian tube rather
than in a test tube as in IVF. It is generally believed that this contributes to
the higher rates of live births following GIFT procedures compared to IVF (26%
versus 16% in one SART study). However, due to the inability to non-surgically
access the fallopian tube, the GIFT procedure requires laparoscopic surgical
placement of a mixture of eggs and sperm ("gametes") in the distal tubal
segment. In addition, diagnostic inaccuracy may result in inadvertent placement
of gametes in damaged tubes, with increased risk of ectopic (tubal) pregnancy.
Since GIFT does not require an expensive laboratory fertilization process, this
procedure has the potential to be less costly than IVF, but the surgical
transfer currently required frequently increases the cost of a GIFT procedure to
approximately $11,000 per cycle. These factors contributed to the limited number
of GIFT procedures (less than 5,000) that were performed in the United States in
1993.
Another factor that can not be overlooked in the treatment of infertility is
time; therapies that are inappropriate take time to administer, and additional
time is often required to assess outcomes before another therapeutic option is
explored. For many patients with fertility status already compromised by age,
time may be the most significant cost associated with the selection of
inappropriate therapy.
7
APPROACHES TO CONTRACEPTION
Surgical fallopian tube sterilization has become the fastest growing method
of contraception worldwide, especially among women over 35, because of its
reliability, and the absence of chronic side effects associated with the
procedure. Typically, fallopian tubes are ligated by cutting or cauterizing the
tubes, or by mechanical occlusion of the tubal lumen using clips or rings in a
surgical procedure such as a laparoscopy or laparotomy. The requirement of
surgery, however, is an obvious limitation of the procedure. The risks
associated with surgery, including the risk of general anesthesia, infection and
other complications, combined with concerns about cost and recovery time, make
the procedure less than ideal. In addition, in many developing countries, where
the need for permanent contraception is critical, there is a shortage of
community surgical facilities. In the United States, over 1,300,000 surgical
tubal sterilization procedures are performed annually. The average cost of these
procedures ranges from approximately $2,500 to approximately $8,000, depending
on the degree of invasiveness of the surgery.
CONCEPTUS' FIRST PLATFORM TECHNOLOGY: TRANSCERVICAL TUBAL ACCESS TECHNOLOGY
Conceptus has developed its minimally invasive transcervical tubal access
technology to address the clinical problems and technological limitations
presented by current fallopian tube infertility and tubal sterilization
approaches. The Company believes that the ability to directly and nonsurgically
access the fallopian tubes will lead to better reproductive outcomes by:
- Improving the accuracy of conventional diagnostic procedures performed to
assess tubal patency.
- Facilitating the performance of a new endoscopic tubal diagnostic
procedure, which will permit the diagnosis of several key aspects of tubal
functionality not adequately assessed today.
- Enabling physicians to select more appropriate tubal therapies, thereby
eliminating many unnecessary therapies.
- Allowing more tubal therapies to be performed nonsurgically, thus avoiding
the risks and costs of surgery and the potential for further
surgery-induced damage to the fallopian tubes.
- Accelerating the selection of appropriate infertility treatment, an
important consideration for women whose infertility status has already
been compromised by age.
- Providing a nonsurgical approach to fallopian tube sterilization, thereby
increasing patient demand for tubal sterilization and expanding its
availability in developing countries where surgical facilities may be
limited.
INFERTILITY PRODUCTS
The Company's proprietary transcervical tubal access technology consists of
specially designed, micro-catheters and guidewires, designed to be atraumatic,
that provide non-surgical access through the cervix and uterus and into the
fallopian tubes. These components are combined with the Company's other
procedure-specific products to produce the T-TAC system, the STARRT Falloposcopy
system, and the
S/TOP system, as well as certain other systems in development.
8
The following table sets forth the clinical indications and regulatory
status of each of the Company's principal infertility products:
PRODUCT SYSTEMS CLINICAL INDICATIONS U.S. STATUS INTERNATIONAL STATUS
- --------------------------- --------------------------- --------------------------- ---------------------------
T-TAC SYSTEM
VS (Variable Softness) Diagnostic tubal 510(k) clearance for: Marketed since 9/95 in 14
Catheter catheterization; diagnosis of PTO; HSG; lap countries.
Guidewires therapeutic tubal and dye; and intrauterine
Soft Torque Uterine catheterization; HSG; lap insemination. System
Catheter and dye; and intrauterine marketed since 8/95,
Soft Seal Cervical Catheter insemination. certain components marketed
Minicerv Cervical Catheter since 4/95.
STARRT SYSTEM
VS Catheter Operative fallopian tube 510(k) clearance for Operative system marketed
Robust Guidewire endoscopy; in- office falloposcopy for PTO; in Australia since 9/95;
Coaxess Uterine Catheter fallopian tube endoscopy. full-length falloposcopy general market introduction
Vision Falloposcope 510(k) filed 3/97. of operative system
Gyne-Flex Stabilizing Arm expected in 1997.
Access Hysteroscope Diagnostic hysteroscopy. 510(k) clearance for Marketed since 9/95 in 14
diagnostic hysteroscopy. countries.
Stargate Catheter Second generation VS 510(k) expected to be filed -
Catheter. in 1997.
S/TOP SYSTEM
Tubal Access Catheter Non-surgical tubal Successful peri- -
Intratubal Micro-Coil sterilization. hysterectomy testing.
Device Pre-hysterectomy testing
Delivery Wire began 3/97.
OTHER SYSTEMS IN
DEVELOPMENT
Transcervical GIFT Falloposcope-guided GIFT. Prototype development -
planned for 1997.
Transcervical Ectopic Catheter-based treatment of Prototype development -
Pregnancy Treatment ectopic pregnancy. planned for 1997.
- ------------------------
T-TAC-TM-, STARRT-TM-, S/TOP-TM-, VS-TM-, Soft Torque-TM-, Soft Seal-TM-,
Minicerv-TM-, Robust-TM-, Coaxess-TM- and Stargate-TM- are trademarks of the
Company. All other tradenames and trademarks appearing in this report are the
property of their respective holders.
TRANSCERVICAL TUBAL ACCESS TECHNOLOGY
VARIABLE SOFTNESS CATHETERS. The Company's Variable Softness Catheters ("VS
Catheters") are designed to enable the physician to atraumatically negotiate the
entire length of the intricate anatomy of the fallopian tubes. The
over-the-wire, co-axial design provides a conduit for guidewires, falloposcopes,
9
therapeutic devices, and fluids such as dyes, to the tubal lumen. The column
strength of the catheter gradually decreases from the relatively stiff proximal
section to a highly flexible distal portion. Its diameter tapers from 1.0 mm at
the proximal section to 0.8 mm at the distal tip. Proprietary design and blended
polymer materials are combined to create this transition in column strength that
facilitates the transmission of forward motion from the physician's hand (push),
while atraumatically negotiating (tracking) the tortuous anatomy of the tubes
more effectively than existing single-stiffness catheters. A radiopaque tip
facilitates visualization of the tip's path under fluoroscopy.
GUIDEWIRES. The Company's guidewires are soft, highly tactile devices used
for atraumatic navigation of the tortuous anatomy of the fallopian tubes. Like
the VS Catheter, these devices are characterized by a high column-strength
proximal end that gradually transitions to a highly flexible distal tip. The
guidewire is used by the physician to guide a VS Catheter to the intended site
at the ostium (the junction of the uterus and the fallopian tube) or in the
fallopian tube. The physician can then use the guidewire to recanalize (reopen)
the tube or can remove the guidewire from the catheter so that other instruments
or therapies can be delivered through the catheter to the intended site. The
guidewires offer a range of flexibility to accommodate a variety of patient
anatomies and physician preferences by utilizing variances in the tapering and
stiffness of the guidewires and other proprietary design features. The Company's
most popular guidewire, the Robust, is designed to optimize the physician's
ability to push the guidewire. Radiopaque tips permit visualization of the
guidewires' progress through the fallopian tube under fluoroscopy, and
identification of occluded sites.
T-TAC SYSTEM
The Company's T-TAC system assists physicians in accessing and navigating
the fallopian tubes and is designed to facilitate more accurate detection and
treatment of tubal disorders. This system is frequently used in selective
injection during HSG, a procedure in which dye is injected sequentially into
each fallopian tube. Compared to standard HSG, selective injection is more
accurate and may be less painful for the patient. The T-TAC system can also be
used in selective salpingography ("SSG"), an enhancement to HSG, or during
laparoscopy as an enhancement to lap and dye. In addition, the system can be
used to recanalize occluded tubes and to deliver sperm accurately to an area
near the ostium in assisted reproductive techniques.
PROCEDURE-SPECIFIC PRODUCTS. The Company's T-TAC system consists of its
proprietary VS Catheter and guidewires, the Soft Torque Uterine Catheter, and
two different cervical catheters (the Soft Seal and the Minicerv).
The Soft Torque Uterine Catheter is introduced into the uterus through the
inner lumen of the Soft Seal Cervical Catheter. This 2.0 mm outer-diameter
catheter has a curved distal end and a soft atraumatic distal tip, which is used
to facilitate accurate placement of the tip near the tubal ostium. After
placement of the distal tip of the Soft Torque Uterine Catheter near the tubal
ostium, a guidewire and a VS Catheter can then be inserted through the inner
lumen of the Soft Torque Uterine catheter to gain access to the fallopian tube.
Multiple curve options of the catheter's design accommodate a variety of patient
anatomies. The tip and shaft are radiopaque to permit visualization of the
catheter under fluoroscopy to assist in the placement of the catheter. The Soft
Torque Catheter's 1.4 mm inner-diameter facilitates the injection of contrast
dye to help diagnose fallopian tube diseases and disorders in procedures such as
HSG or to deposit sperm near the ostium to facilitate artificial insemination.
The Soft Seal Cervical Catheter is designed to provide an atraumatic
mechanism for gaining access to and manipulating the uterus, for performing
standard HSG and as a platform for performing other uterine diagnostic
procedures. This 4.5 mm catheter provides access to the uterus without cervical
dilatation while a latex balloon at the tip is used to seal the cervical canal.
The catheter is made of polymers and incorporates a unique malleable stiffening
wire to add column strength during introduction to the uterus. Its 2.3 mm inner
diameter permits easy passage of other devices, such as another catheter.
10
The Minicerv Catheter is a miniature hysterosalpingography (HSG) catheter
designed for maximal patient comfort. The tiny 5 French shaft with a tip is
designed to be atraumatic and slide easily across the cervix for access to the
uterus. The shapeable mandrel provides column strength for insertion and can be
shaped to match patient anatomy. A polyurethane balloon avoids the latex
allergies which can be an issue with other hysterosalpingography catheters.
Because the polyurethane balloon material is non-compliant, it maintains its
shape once inflated and will not dislodge when manipulating the uterus.
CLINICAL AND REGULATORY STATUS. In July 1995, the Company received 510(k)
clearance for the use of the Company's T-TAC products for fallopian tube
catheterization to diagnose PTO under fluoroscopic, hysteroscopic or
laparoscopic guidance. The Company has also received 510(k) clearance for some
of the products in its T-TAC system for use during HSG, selective injection
during HSG, intrauterine insemination and in conjunction with laparoscopic
procedures.
The Company has received all regulatory approvals necessary to sell its
T-TAC system for both diagnostic and therapeutic fallopian tube catheterization
indications in Austria, France, Germany, the Netherlands, Sweden, Switzerland,
the United Kingdom, Canada, Australia and South Africa, and is seeking approval
to market these products in Italy, Spain and Israel.
STARRT FALLOPOSCOPY SYSTEM
The Company's STARRT Falloposcopy system is designed to enable the physician
to view the full length of the fallopian tube using a flexible, fiberoptic
endoscope to diagnose tubal diseases and disorders more effectively and
accurately, and thereby to prescribe more appropriate therapeutic measures. The
Company is developing two configurations of its STARRT system. The operative
system is being designed to be used to diagnose the fallopian tubes adjunctively
with a laparoscopic abdominal diagnostic evaluation. The in-office system is
being designed to facilitate the performance of falloposcopy in an office
setting by a physician working without assistance on a mildly sedated patient.
PROCEDURE-SPECIFIC PRODUCTS. The STARRT system consists of the Stargate
Catheter (a modified version of the VS Catheter), the Robust guidewire, the
Coaxess Uterine Catheter, the Vision Falloposcope, and two additional products
which may also be used independently: the Access Hysteroscope and the Gyne-Flex
stabilization system.
The Access Hysteroscope is a fiberoptic, articulating tip endoscope that
provides the physician with visual access to the uterus in diagnostic
hysteroscopy or for use in conjunction with the remainder of the system as an
integral tool in tubal catheterization and falloposcopy. The hysteroscope is
passed through the cervix into the uterus to provide the physician with a view
of the interior of the uterus. When used as a part of the falloposcopy system,
the physician aligns the distal end of the scope with the tubal ostium. The
hysteroscope's deflectable tip permits visualization of and access to the tubal
ostium. The hysteroscope's imaging fibers provide high resolution imaging, and
its working channel can accommodate the Stargate catheter as well as other
devices for tubal diagnosis, endometrial biopsy and therapeutic indications.
The Company's Gyne-Flex stabilization system can be used to affix the
hysteroscope to the examining table to facilitate precise and secure positioning
of the hysteroscope in the uterus. The Company's STARRT Falloposcopy system can
also be used with rigid operative hysteroscopes from other suppliers, since many
physicians prefer to use their existing operative hysteroscopes to evaluate the
uterus at the time that a falloposcopy procedure is performed. Conceptus has
designed the Gyne-Flex to be compatible with the most commonly used rigid
hysteroscopes. In addition, the Gyne-Flex stabilization system can also be used
by itself to provide assistance in securing instruments during laparoscopy.
11
After alignment of the hysteroscope with the ostium in the uterus, the
physician advances a specially designed Stargate Catheter and a guidewire
through the working channel of the hysteroscope to catheterize the fallopian
tube. When the guidewire and catheter reach the fimbrial end of the fallopian
tube or a point of resistance, the guidewire is removed and the Vision
Falloposcope is inserted into the catheter and advanced until it is aligned with
the distal tip of the catheter. This 0.45 mm diameter flexible fiberscope has
3,000 imaging fibers to provide quality imaging. The physician is then able to
view the entire length of the lumen of the fallopian tube in a retrograde manner
by gently withdrawing the catheter and falloposcope. Special design
characteristics of the Stargate Catheter permit good irrigation around the
falloposcope resulting in tubal distension, thereby enhancing visualization of
the tubal lumen.
Conceptus believes that a unique variation of its falloposcopy system may
allow the Company to offer a system which makes in-office falloposcopy possible.
Presently, falloposcopy is performed in conjunction with laparoscopy. While this
may continue to be a preferred method for many physicians, the Company believes
that the ability to perform falloposcopy in an in-office, non-surgical procedure
without concurrent laparoscopy may appeal to physicians, especially those who do
not typically perform laparoscopy or other surgical procedures.
CLINICAL AND REGULATORY STATUS. 510(k) clearance for the STARRT system was
obtained in January 1997 for the diagnosis of PTO. This application was
supported by a United States safety and feasibility study and the International
Multicenter Study of Falloposcopy (the "IMSF"). The United States safety and
feasibility study, completed in August 1995, was conducted in five centers in
the United States and Australia under an FDA-approved Investigational Device
Exemption ("IDE"). Of fallopian tubes studied that had a prior diagnosis of PTO
from conventional diagnostic methods, 61% were found to be patent on
falloposcopic evaluation. Two cases of tubal dissection (5%) were reported with
no clinical sequelae noted in either case. The PTO cases from the IMSF were also
reviewed by FDA as part of the 510(k) filing. Of the 51 tubes diagnosed with PTO
by HSG, falloposcopic evaluation revealed patency in 37 tubes (72%). Of 47 tubes
diagnosed with PTO by lap and dye, falloposcopic evaluation revealed patency in
38 tubes (81%).
In 1994, a 21-center clinical study of the STARRT Falloposcopy system was
initiated in Europe and Australia by the core center for the IMSF at the
University of Heidelberg. Not limited to the diagnosis of PTO, over 375 patients
have been enrolled in this study which compares the diagnosis of infertility by
falloposcopy to conventional methods of diagnosis, HSG and laparoscopic
chromopertubation, or lap and dye. Study results from the first 315 patients
enrolled indicate that in approximately 64% of the cases, falloposcopy provided
diagnostic information that was unobtainable by HSG, and in approximately 58% of
the cases, fallopscopy provided diagnostic information not obtainable by lap and
dye. The catheterization success rate in this trial was 84% and the
visualization success rate was 82%. A 3.7% rate of complications has been
reported in this study, involving uterine and tubal perforation and tubal
dissections, with no serious complications.
Prior to the initiation of the IMSF, the Company's falloposcopy system was
used in a 122 patient single-center study in South Australia conducted by Dr.
John Kerin, a pioneer in falloposcopy. In the study, Dr. Kerin was able to
identify endolumenal tubal pathology, categorize patients by pathological
findings and demonstrate statistically significant differences in pregnancy
outcomes in patients.
In March 1996, the Company received 510(k) clearance for its hysteroscopy
device as a stand-alone device for the diagnosis of uterine (as opposed to
tubal) disorders.
The Company has obtained all necessary regulatory approvals for sale of its
STARRT system in certain foreign countries including Austria, France, Germany,
the Netherlands, Sweden, Switzerland, the United Kingdom, Canada, Australia and
South Africa and is seeking approvals to sell its products in Italy, Spain and
Israel. The Company may seek approvals to market its products in other
countries.
The Company's primary near-term commercial products, the T-TAC and STARRT
systems, have been developed for limited indications to date. Current
applications for those systems include accessing,
12
diagnosing and treating diseases and disorders of the fallopian tubes. Expanding
the number of applications for these products will require additional
development and, in certain cases, clinical trials and regulatory approvals. The
Company would experience a material adverse effect on its business, financial
condition and results of operations if these products are not successfully
commercialized for existing or future applications.
S/TOP SYSTEM
The Company is developing a non-surgical procedure for female sterilization
using the Company's proprietary transcervical tubal access system and a unique
tubal micro-coil device and delivery wire.
PROCEDURE-SPECIFIC PRODUCT. The Company is developing a proprietary
micro-coil sterilization device to be deployed permanently into each fallopian
tube using the Company's minimally invasive tubal access and delivery system and
the Company's unique delivery wire. The micro-coil device has been designed to
effectively occlude the lumen of the fallopian tube and be physically
incorporated into the tubal wall to prevent expulsion. The Company believes that
this device and procedure should reduce the clinical risks and costs associated
with most current tubal sterilization procedures while delivering a reliable,
safe method of sterilization.
CLINICAL AND REGULATORY STATUS. In 1995, the Company completed IN VITRO
feasibility studies and a successful animal study that demonstrated 100%
pregnancy prevention in the 20 animals in which the device remained correctly
placed.
In September 1995, Conceptus commenced a Phase I clinical study of the S/TOP
device under an Institutional Review Board ("IRB") approval with a
non-significant risk determination. This study involved the placement of the
S/TOP device in patients at the time of hysterectomy in order to assess the
ability to access the fallopian tube and place the device properly, and the
acute retention of the device. As of February 1997, the device had been
implanted in 29 patients. IDE approval has been obtained for an expanded Phase I
clinical study in 20 patients who are scheduled for a hysterectomy 6-12 weeks
after hysteroscopic placement of the S/TOP device. This study is designed to
evaluate histologically any adjacent tissue reaction and patient recovery from
the device placement procedure, in addition to the Phase I trial objectives. Two
patients have been enrolled in this study and have undergone the S/TOP device
placement procedure in an office setting. Two additional Phase I studies are
being conducted to evaluate feasibility of placing the device under fluoroscopic
and sonographic visualization. Ten patients will be enrolled in each of the
studies. As of February 1997, four patients have been enrolled in the
fluoroscopic study and one patient has been enrolled in the sonographic study.
The Company has submitted an application to begin a Phase II clinical study
in Australia. Approval has been granted by the reviewing Ethics Committee to
commence the study. Conceptus expects this study will involve ten patients
scheduled for tubal sterilization and will assess long-term device retention,
effectiveness and safety. The Company expects to follow this study with an
expanded Phase II study, which will likely involve 50 patients. A Phase III
study, which will involve a larger patient population and long-term follow up in
support of a Pre-Market Approval ("PMA") application, will follow.
The Company is in the process of determining the final material composition
of the S/TOP device. The Company may choose to include copper as an element in
the device since it has been shown to have clinical activity as a contraceptive.
In the event copper is used in the S/TOP device, it will be evaluated by the FDA
as a drug rather than as a device, and thus the FDA's Investigational New Drug
("IND") and New Drug Application ("NDA") regulations would be applicable to the
clinical study and eventual commercialization of the device. If copper is not
incorporated, the S/TOP device will be treated as a medical device and require a
PMA. In November 1995, the Company met with the appropriate sections of both the
Office of Device Evaluation and the Office of Drug Evaluation of the FDA to
discuss their respective new product approval processes and requirements for
this device. Based upon the information obtained during these meetings, the
Company does not believe that there would be a material difference in the
regulatory
13
requirements nor the product approval review cycle times between the drug and
device regulatory groups within the FDA.
OTHER APPLICATIONS OF TRANSCERVICAL TUBAL ACCESS TECHNOLOGY
The Company is also leveraging its proprietary transcervical tubal access
technology to create the following procedure-based product systems. These will
address additional diagnostic and therapeutic needs in the field of reproductive
health in which transcervical, non-surgical methods can improve clinical
outcomes or achieve cost reductions.
TRANSCERVICAL GIFT. The Company is planning to develop a
falloposcope-guided transcervical GIFT delivery system. Under current GIFT
procedures, a mixture of gametes is passed through a laparoscope into the
fallopian tube. Although the Company believes that physicians would prefer a
non-surgical transcervical approach to GIFT, to date transcervical GIFT
procedures have been limited by the inability of physicians to access the
fallopian tubes routinely and to confirm delivery and retention of the gametes
in the proper section of the tubes. The Company's transcervical GIFT system
would use the T-TAC fallopian tube access system and a falloposcope-guided
delivery system to atraumatically deliver the gametes under controlled
conditions to the ampulla of the fallopian tube. The Company believes that such
a procedure would improve the clinical efficacy of GIFT procedures and avoid the
patient health risks and cost associated with the more invasive laparoscopic
procedures currently utilized in GIFT.
The FDA has stated its intention to downgrade the classification of
catheters used in GIFT procedures from the current Class III classification,
which requires a PMA approval prior to commercialization, to a Class II or even
Class I status, which require only 510(k) clearance. The Company believes some
clinical data may still be required prior to commercialization of GIFT
catheters, even if classified as Class I or Class II devices. The Company
intends to review its regulatory approach to transcervical GIFT at the time new
FDA regulations regarding assisted reproductive techniques are published.
TRANSCERVICAL ECTOPIC PREGNANCY TREATMENT. An ectopic pregnancy occurs when
the fertilized egg fails to migrate through the fallopian tube to the uterus.
Unless properly treated, the developing embryo in the fallopian tube can be
life-threatening to the mother. This condition is currently treated through an
invasive, surgical laparotomy under general anesthesia requiring termination of
the pregnancy and surgical repair of the tube. Approximately 100,000 ectopic
pregnancies are treated annually in the United States, a procedure which
typically is reimbursed by third-party payors. The Company believes physicians
would prefer a non-surgical method of treating ectopic pregnancies and have
attempted in investigational studies to terminate ectopic pregnancies through
systemic administration of abortive drugs. Systemic delivery of abortive drugs,
however, may cause adverse side effects by exposing organs remote from the
targeted area to toxic effects of the drugs. This generally requires that
dosages be small, which limits the efficacy of the drugs. The Company believes
that use of its transcervical fallopian tube access system to provide visually
guided, site-specific delivery of abortive agents, such as methotrexate or
saline solution, should improve patient outcomes while reducing the systemic
exposure to dangerous drugs, the likelihood of tubal damage and the cost of the
procedure.
CONCEPTUS' SECOND PLATFORM TECHNOLOGY: RESECTOSCOPY
The Company's acquisition of Microgyn in November 1996 provides another
significant platform technology and product portfolio to more effectively meet
the needs of the interventional gynecologist.
Therapeutic hysteroscopy is one of the most rapidly growing procedures in
gynecology to treat uterine disorders, which may result in recurrent pregnancy
loss, dysfunctional uterine bleeding, and pelvic pain. This procedure can often
provide a less invasive alternative to hysterectomy, the removal of the uterus,
which is an invasive surgical procedure performed more than 600,000 times each
year in the United States.
14
In performing uterine therapy using a hysteroscope, the uterus must be
distended and the visibility maintained by use of an optically clear fluid.
Using a continuous flow of non-viscous media into and out of the uterine cavity,
the surgeon is provided a bloodless operative field in which tissue removal or
ablation can be carefully guided under direct visualization. Using monopolar
(RF) electrosurgical energy to cut or ablate adds a restriction on the type of
fluid that can be used: a non-conductive, hypotonic, non-physiologic distention
medium must be employed. Fluids such as mannitol, sorbitol, and glycine are
adequate for this purpose but present a risk to the patient. Non-conductive
fluids are electrolyte-free (hypotonic) substances and therefore can change
levels of vital electrolytes such as sodium, potassium, and chloride in the
patient.
In therapeutic hysteroscopy, both small and large blood vessels are cut as
tissue is removed. Since the hypotonic fluids must be infused into the uterus
under pressures as high as 60-80 mmHg in order to distend the uterine cavity, a
large amount of fluid can be forced into venous channels, which normally
maintain a pressure of about 20 mmHg. During the procedure, fluid loss into the
patient is carefully monitored by a nurse, via fluid deficit calculations,
comparing fluid used versus fluid recovered. The surgeon is kept apprised of the
patient's fluid status, because there are complications associated with the
absorption of large amounts of hypotonic solutions, including serious heart,
lung, and brain disorders, sometimes leading to coma and death.
RESECTOSCOPY SYSTEM PRODUCTS
The Company's hysteroscopy system consists of the following products: a
simple, disposable Resectoscope Safety Sheath, cutting loops, coagulating roller
balls, and other devices under development. The Resectoscope Safety Sheath, when
installed on the standard hysteroscope, changes the flow of electrosurgical
energy delivered during cutting. This innovative approach permits the use of
isotonic solutions, such as normal saline, which are physiologically compatible.
The ability to effectively use isotonic solutions during hysteroscopic
procedures should eliminate the risk of serious electrolyte disturbances and
their associated complications. The system is easy to use since it is designed
for total mechanical compatibility with existing hysteroscopic instrumentation
and power sources.
The following table sets forth the clinical indications and regulatory
status of the Company's Hysteroscopy system:
CLINICAL
PRODUCT SYSTEMS INDICATIONS U.S. STATUS INTERNATIONAL STATUS
- ------------------------------ ------------------ ------------------------------ ------------------------------
Resectoscope Safety Sheath Therapeutic 510(k) clearance for urology; Product release to select
Cutting loops hysteroscopy. 510(k) for gynecology planned countries planned for 1997.
for 1997.
Coagulating roller balls Therapeutic 510(k) for gynecology planned Product release to select
hysteroscopy. for 1997. countries planned for 1997.
CLINICAL AND REGULATORY STATUS. As of March 1, 1997, the Resectoscope
Safety Sheath has been clinically studied in 9 patients under a non-significant
risk trial in the United States. No device-related adverse events were reported
in these patients, and the safety sheath was reported to perform effectively. A
510(k) for transcervical resection and ablation of the uterus is planned to be
filed in 1997. In addition to its application for therapeutic hysteroscopy, this
technology has urologic applications. 510(k) clearance has been obtained for use
in transurethral resection and ablation in the urethra, prostate and bladder.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed internally
by its 14-person research and development staff. The Company intends to expand
utilization of its proprietary technologies in a broad range of applications to
enhance the diagnosis and treatment of reproductive disorders,
15
including male reproductive disorders. Several physician-sponsored clinical
studies have been performed which the Company believes demonstrate the potential
utility of the Company's catheter, guidewire and micro-coil technologies for the
treatment of male reproductive disorders. Research and development expense for
the years ended 1996, 1995 and 1994 were $3.8 million, $2.6 million and $1.8
million, respectively.
MANUFACTURING
The Company manufactures its proprietary catheters in environmentally
controlled areas at its facility in San Carlos, California. The Company has
recently been inspected by the FDA, and is in substantial compliance with all
FDA requirements including FDA Good Manufacturing Practices ("GMP") for medical
devices. The Company has been inspected by the California Department of Health
Services ("CDHS") and is registered with the State of California to manufacture
its medical devices and drugs. The State of California Food and Drug Branch
conducted a two day inspection of the San Carlos facility in February 1997 and
as a result of that inspection, recommended that Conceptus be issued a Drug
License.
Raw materials are purchased from various qualified vendors, subjected to
stringent quality specifications and assembled by the Company into the final
products. The Company routinely conducts quality audits of suppliers and has
adopted a vendor qualification program. The Company obtains certain products
from sole source suppliers, such as endoscopes from Mitsubishi Cable America,
Inc. and cervical catheters from Applied Medical Resources and Infinity
Extrusion and Engineering, Inc. The Company does not have formal supply
contracts with several key vendors and, accordingly, no assurance can be made
that such firms will continue to supply the Company with such raw materials or
finished goods in sufficient quantities, or at all. The Company believes that
alternative suppliers are available for its raw materials and other product
components and plans to qualify additional suppliers when sales volumes warrant.
Although the Company intends to maintain sufficient levels of inventory to avoid
any material disruption resulting from the scale-up of manufacturing, there can
be no assurance that the Company will be able to manufacture and supply
sufficient products to meet potential demand. Delays associated with any future
raw materials or finished goods shortages could have a material adverse effect
on the Company's business, financial condition and results of operations,
particularly as the Company scales up its manufacturing activities in support of
international and United States commercial sales.
The Company utilizes a facility to receive imports of certain inventory
materials in order to avoid or delay the payment of duties until the product is
used in the United States, or shipped to a distributor outside of the United
States.
The Company has limited experience in manufacturing its products in
commercial quantities. The Company currently manufactures products in small
quantities for United States clinical trials, international clinical trials and
limited commercial sales. Manufacturers often encounter difficulties in scaling
up production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. There can be no assurance that the Company will not encounter
manufacturing difficulties, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
MARKETING AND DISTRIBUTION
The Company's marketing strategy is designed to promote awareness of the
clinical efficacy and cost-effectiveness of the minimally invasive
interventional gynecology procedures in which the Company's products are used.
The Company implements this strategy by providing clinical and technical
information that encourages the physician to perform procedures utilizing the
Company's products. In the infertility area, a key component of the Company's
marketing strategy is a public relations campaign designed to use the mass media
to increase patient awareness of the benefits of less invasive and more accurate
diagnosis of fallopian tube diseases and disorders and improved tubal therapies
provided by transcervical access
16
procedures. The Company also intends to work closely with patient education,
support and advocacy organizations. The Company believes that it is critical to
develop and maintain close working relationships with patient organizations as
well as physicians, as infertility patients are increasingly involved in the
selection of their therapy. In the therapeutic hysteroscopy area, the Company
plans to promote the benefits of this less invasive alternative to hysterectomy
and the significant safety and cost advantages afforded by its Hysteroscopy
system products. The Company's marketing strategy will include developing
influential product champions, publishing and presenting on the safety and cost
effectiveness of its products, conducting workshops, exhibiting a strong
presence at key gynecologic endoscopy meetings, and selectively utilizing
advertising, direct mail and telemarketing.
The Company is focusing its United States marketing efforts primarily on
what it estimates to be the approximately 7,500 interventional gynecologists who
maintain a high-volume practice in gynecological endoscopy, and as a result,
primarily treat infertility and pre- and peri-menopausal symptoms. A key element
of the Company's marketing strategy is to develop relationships with prominent
physicians who are particularly active in interventional gynecology, and to
involve these physicians in the Company's clinical and product development
activities. The Company intends to continue to build these relationships through
sales efforts, workshops and meetings to discuss clinical issues and treatments.
Interventional gynecology is an emerging market for which there is no proven
distribution channel in the United States. Accordingly, during the initial phase
of commercializing the Company's products, the Company's marketing and sales
strategy involves the use of a combination of sales specialists directly
employed by the Company and contract sales representatives who have significant
experience in physician detailing of gynecological products. The role of the
sales specialists and contract sales representatives will be to demonstrate the
use of the Company's products, while educating physicians as to the intended
clinical benefits of transcervical fallopian tube access and the safety and cost
effectiveness of performing therapeutic hysteroscopy using isotonic solutions,
using detailing techniques similar to those commonly employed in the medical
device industry. The Company believes that this combination of direct sales
specialists, employed in territories with concentrated numbers of interventional
gynecologists, and contract sales representatives in other territories, will
provide the highest quality, most rapid and cost-effective means for introducing
its initial products. If the Company's product systems are successful, Conceptus
intends to expand its focused distribution channel in the United States
interventional gynecology market by increasing the number of sales
representatives that are directly employed by the Company.
The Company believes that there are a number of small firms with products
that are complementary to the Company's but which to date have been unable to
establish an effective distribution channel for such products. As part of its
distribution strategy, the Company will seek to acquire or license the rights to
market complementary products from other companies which can be marketed to the
interventional gynecologist.
There can be no assurance that the Company's sales or products available for
sale will require a sales organization of direct sales specialists and contract
sales representatives, that the Company will be able to attract and retain the
necessary qualified sales personnel, that the Company will be successful in
creating an effective distribution channel for its products or that the Company
will be able to acquire the rights to market additional products.
Although the Company is fully dedicated to meeting the needs of the
interventional gynecologist, some of its products have applications in two other
specialty areas, radiology and urology. To capitalize on the opportunities
available in these other areas, the Company's distribution strategy also
includes entering into partnerships with leading companies in both radiology and
urology, allowing the Company to focus its internal marketing and sales efforts
on interventional gynecology. In July 1996, the Company announced the signing of
an agreement with Mallinckrodt Group, Inc. ("Mallinckrodt"), a major supplier of
radiological contrast media, which grants Mallinckrodt exclusive marketing
rights for radiology applications in North, Central and South America. The
Company retained all marketing rights for its T-TAC
17
system in the gynecology market segment. The Company is currently engaged in
discussions with potential distribution partners to market the Hysteroscopy
system product line for the urologic applications. There can be no assurance
that the Company will enter into a distribution arrangement for urologic
applications of its Hysteroscopy system. In addition, there can be no assurance
that any of the Company's distribution partners will successfully market the
Company's products for applications in radiology or urology. The failure to
establish and maintain effective distribution partnerships for the Company's
products for these applications would have a material adverse effect on the
Company's business financial condition and results of operations.
The Company has only limited experience marketing and selling its products,
and does not have experience marketing and selling its products in commercial
quantities. The Company intends to substantially increase its United States
marketing efforts by increasing the sales coverage throughout the United States
during 1997. Establishing marketing and sales capability sufficient to support
sales in commercial quantities will require significant resources, and there can
be no assurance that the Company will be able to recruit and retain qualified
marketing personnel, direct sales personnel or contract sales representatives or
that future sales efforts of the Company will be successful. While the Company
is committed to establishing an effective distribution channel for its products,
there can be no assurance that the Company will be successful in doing so. The
failure to establish and maintain an effective distribution channel for the
Company's products, or to retain qualified sales personnel to support commercial
sales of the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Outside of the Mallinckrodt partnership, the Company currently markets its
products internationally primarily through established distributors of specialty
gynecological products. The only exception is that in June 1996, the Company
appointed Schering Health Care, Ltd., a major supplier of reproductive
pharmaceuticals to this market, as its exclusive distributor in the United
Kingdom to the interventional gynecology market. The Company has two sales
managers located in Europe and expects to expand its international sales and
marketing organization 1997. The Company's products are currently marketed
through specialty distributors in the Netherlands, Spain, Sweden, Switzerland,
Australia, Israel and South Africa. The Company is negotiating with distributors
to cover the remaining countries in Europe, the Pacific Rim (including Japan)
and Latin America. The Company generally operates under written distribution
agreements with its distributors which grant the exclusive right to sell the
Company's products within a defined territory. These distributors also typically
market other medical products, although the Company seeks to obtain covenants
from its distributors prohibiting them from marketing medical devices that
compete directly with the Company's products. The Company's distributors
typically purchase the Company's products at a discount from list price and
resell the products to hospitals, clinics and physicians. Sales to international
distributors are usually denominated in United States dollars. The end-user
price is determined by the distributor and varies from country to country.
The Company's international sales are dependent upon the marketing efforts
of, and sales by, a limited network of distributors. The Company relies on these
distributors to assist it in obtaining product registration and reimbursement
approvals in certain international markets. The Company's current strategy is to
operate internationally through distributors with an established franchise in
the field of gynecology. If a distributor were to fail to invest adequate
capital promoting the Company's products and training physicians in the proper
techniques for utilizing the Company's products, or were to cease operations,
the Company would likely be unable to achieve significant sales in the subject
territory. In addition, because the Company has strategically replaced several
of its international distributors, it has only limited sell-through experience
with its current distributors. Furthermore, the Company does not currently have
distributors in a number of international markets that it has targeted and will
need to establish additional international distribution relationships. There can
be no assurance that the Company will engage qualified distributors in these
markets in a timely manner, if at all. The failure to engage such
18
distributors would have a material adverse effect on the Company's business,
financial condition and results of operations.
A number of risks are inherent in international operations and transactions.
International sales and operations may be limited or disrupted by the imposition
of government controls, changes in regulatory requirements or interpretations
thereof, export license requirements, political instability, trade restrictions,
changes in tariffs, and difficulties in staffing, coordinating and managing
international operations. Additionally, the Company's business, financial
condition and results of operations may be adversely affected by fluctuations in
international currency exchange rates as well as constraints on the Company's
ability to maintain or increase prices. There can be no assurance that the
Company will be able to successfully commercialize its current or future
products in any international market.
A substantial portion of the Company's revenues to date have been derived
from products sold for use in clinical studies. Of the Company's sales for the
fiscal year ended December 31, 1996, 68% were derived from domestic sales and
32% were derived from international sales. Sales to the Company's distributor in
the Americas (Mallinckrodt Group, Inc.), the Company's distributor in the United
Kingdom (Schering Health Care, Ltd.) and a domestic customer (Gleicher &
Associates, M.D.) accounted for approximately 46%, 19% and 11%, respectively, of
total sales for the year ended December 31, 1996.
The Company's products have generated limited revenue to date. There can be
no assurance that any of the Company's existing or future products will gain any
significant degree of market acceptance among physicians, patients and
healthcare payors, even if reimbursement and necessary international and United
States regulatory approvals are obtained. The Company believes that
recommendations and endorsements by physicians will be essential for market
acceptance of the Company's products, and there can be no assurance that any
such recommendations or endorsements will be obtained. The Company believes that
physicians will not use the Company's products unless they determine, based on
clinical data and other factors, that these systems are an attractive
alternative to other means of diagnosing and treating diseases and disorders of
the female reproductive system, and that the products offer clinical utility in
a cost-effective manner. Acceptance among physicians will also depend upon the
Company's ability to train interventional gynecologists and other potential
users of the Company's products in new interventional techniques, and the
willingness of such users to learn these new techniques. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS, TRADE SECRETS AND LICENSES
Conceptus's policy is to aggressively protect its proprietary position by,
among other things, filing United States and foreign patent applications to
protect technology, inventions and improvements that are important to the
development of its business. The Company's strategy includes extending the
patent protection of its in-licensed technology (from Target) by filing
procedure-specific method patents wherever possible for the use of the Company's
products in new clinical applications, as well as aggressively pursuing patents
for all its other inventions and developments.
As of March 1, 1997, Conceptus had applied for 15 United States patents,
three of which have been issued to the Company, and has filed 10 foreign
patents. The Company's issued patents contain claims regarding guidewire
manipulation, a novel guidewire design and a delivery mechanism for a tubal
occlusion device. The pending applications cover various aspects of the
Company's proprietary tubal access platform technology, including certain claims
specific to falloposcopy, as well as the Company's S/TOP device, products
allowing the use of physiologic solution during operative hysteroscopy and other
products that are currently, or in the future may be, used in conjunction with
the Company's product systems. Conceptus is also the licensee (from Target) for
exclusive use in the field of reproductive physiology, of substantial technology
developed by Target as described below, and has granted to Target an exclusive
license in certain fields of interventional medicine outside of the field of
reproductive physiology to certain
19
Conceptus technology. Conceptus's exclusive license of Target's technology is
applicable to all technology available as of February 1, 1996. Conceptus does
not have any preferential rights for Target technology developed following that
date. As of March 1, 1997, Target held, and Conceptus exclusively licensed from
Target within the field of reproductive physiology, 44 issued United States
patents, 76 United States patent applications and numerous foreign patents
issued and applications pending covering various aspects of its products and
core technology. Target's issued patents relate to the design of Target's
micro-catheters, the initial patent for which expires in June 2006, certain
aspects of guidewire design and other important aspects of Target's
micro-catheter, guidewire and micro-coil technologies. In the event that such
Target patents are at any time invalidated, the Company's proprietary position
in the marketplace would be severely compromised. In addition, should the Target
technology licensed to the Company be found to infringe upon a third party's
technology, the Company's sale of products based on such infringing Target
technology could be limited. Finally, in the event that the Company materially
breaches the terms of its license from Target, Target will have the right to
terminate the license. Any such termination of this license would deprive the
Company of the right to develop or sell products based on the licensed
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's ability to compete effectively will depend substantially on
its ability to develop and maintain proprietary aspects of its technology. There
can be no assurance that the Company's three issued patents, any future patents
that may be issued as a result of the Company's United States or foreign patent
applications, or the patents under which the Company has license rights, will
offer any degree of protection to the Company's products against competitive
products. There can be no assurance that any patents that may be issued or
licensed to the Company or any of the Company's patent applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
industry have employed intellectual property litigation to gain a competitive
advantage. There can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the United States Patent and Trademark Office ("USPTO")
to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect the
Company's trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others.
Any litigation or interference proceedings involving the Company will result
in substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
A patent issued to Target and subject to Target's license to the Company,
which contains claims relating to the design of the Company's Variable Softness
Catheters (the "Target patent"), has been the subject of four reexamination
proceedings in the United States Patent and Trademark Office ("USPTO").
20
Following the completion of the first such proceeding, the USPTO issued a
reexamination certificate and confirmed the patentability of the patent claims
set forth in the certificate. Requests for second, third and fourth
reexaminations of the patent were initiated by one of Target's competitors,
SciMed Life Systems, Inc. ("SciMed"), a subsidiary of BSC, and after the USPTO's
review of such petitions Target received notice from the USPTO that it had
reaffirmed the patentability of the claims of the Target patent. Notwithstanding
this result, no assurance can be given that SciMed will not mount a legal
challenge to the validity of the Target patent or that Target would prevail in
any such action. In November 1994, Target filed a lawsuit in United States
District Court against SciMed and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson Inc., alleging infringement of a Target patent
relating to variable stiffness in microcatheters, and seeking damages and
preliminary and permanent injunctive relief. The defendants responded,
challenging the validity of the patent, denying infringement, and raising other
defenses. In May 1996, the District Court granted Target's motion for an
injunction prohibiting the defendants from continuing to sell the products
alleged to infringe the patent. In July 1996, the United States Court of Appeals
for the Federal Circuit stayed the injunction pending an appeal by the
defendants, and the Court of Appeals heard oral argument on the appeal in
January 1997. Any invalidation of the Target patent could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On January 20, 1997, Target and BSC announced the signing of a definitive
agreement to merge in a tax-free stock-for-stock transaction. As a result of the
merger, which is expected to close during the second calendar quarter of 1997,
Target will become a separate business unit of BSC. Following the consummation
of the merger, it is anticipated that Target will continue the litigation of
Cordis.
Conceptus also relies upon trade secrets and technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute appropriate confidentiality and assignment of inventions agreements
in connection with their employment, consulting or advisory relationship with
the Company. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will not be breached or that Conceptus will have
adequate remedies for any such breach. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
proprietary technology, or that Conceptus can meaningfully protect its rights in
unpatented proprietary technology.
GOVERNMENT REGULATION
UNITED STATES
The research, development, manufacture, labeling, distribution and marketing
of the Company's products are subject to extensive and rigorous regulation by
the FDA and, to varying degrees, by state and foreign regulatory agencies. The
Company's products are regulated in the United States as medical devices
21
by the FDA under the Federal Food, Drug, and Cosmetic Act (the "FDC Act") and
most require clearance or approval by the FDA prior to commercialization. In
addition, material changes or modifications to medical devices also are subject
to regulatory review and clearance or approval. Under the FDC Act, the FDA
regulates the research, clinical testing, manufacturing, safety, labeling,
storage, record keeping, advertising, distribution, sale and promotion of
medical devices in the United States. The testing for, preparation of and
subsequent review of applications by the FDA and foreign regulatory authorities
is expensive, lengthy and uncertain. The failure by the Company to comply with
FDA requirements could result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, the government's refusal to grant premarket clearance or premarket
approval for devices, and criminal prosecution. Accordingly, the Company has
invested in building an experienced team of regulatory professionals. For
example, the Company's Senior Vice President, Clinical Research, Regulatory
Affairs and Quality Assurance was appointed by the FDA to its OB/GYN Advisory
Panel.
The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an IDE application must be approved prior to
commencing clinical trials. The IDE application must be supported by data,
typically including the results of laboratory and animal testing. If the IDE
application is approved by the FDA, clinical trials may begin at a specific
number of investigational sites with a maximum number of patients, as approved
by the agency. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such costs do not exceed
recovery of the costs of manufacture, research, development and handling. The
clinical trials must be conducted under the auspices of an IRB pursuant to FDA
regulations.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain premarket
notification clearance under Section 510(k) of the Federal Food, Drug, and
Cosmetic Act ("510(k)") or a premarket approval ("PMA"). In addition, material
changes to medical devices are also subject to FDA review and clearance or
approval. If a medical device manufacturer or distributor can establish, among
other things, that a device is "substantially equivalent" in intended use and
technological characteristics to certain legally marketed devices, for which the
FDA has not required a PMA, the manufacturer or distributor may seek clearance
from the FDA to market the device by filing a 510(k). Though generally believed
to be a shorter, less costly regulatory path than a PMA, the 510(k) may need to
be supported by appropriate data establishing to the satisfaction of the FDA the
claim of substantial equivalence to the predicate device. In addition, the FDA
may require review by an advisory panel as a condition for 510(k) clearances,
which can further lengthen the regulatory process. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k), the manufacturer or distributor may not
place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information, including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA. Such a request for additional
information or determination that the device is not substantially equivalent
would delay market introduction of the products that are the subject of the
510(k).
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA. A PMA must be supported by extensive data,
including, laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device as well as extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
FDA review of a PMA generally takes approximately two years or more from the
date of filing to complete. If granted, the
22
approval of the PMA may include significant limitations on the indicated uses
for which a product may be marketed. The PMA process can take several years from
initial filing and requires the submission of extensive supporting data and
clinical information. No assurance can be given that any future products or
applications developed by the Company will not require approval under the more
lengthy and expensive PMA process. If the Company is required to obtain approval
for any products pursuant to the PMA procedure or, if the 510(k) process with
respect to any products is extended for a considerable length of time, the
commencement of commercial sales of the Company's products will be delayed
substantially.
To date, the Company has received five 510(k) clearances for certain
diagnostic and therapeutic indications of its T-TAC system. In addition, the
Company received 510(k) clearance in January 1997 for its STARRT Falloposcopy
system, for diagnosis of PTO. The Company received 510(k) clearance in March
1996 for its hysteroscopy device as a stand-alone device for the diagnosis of
uterine (as opposed to tubal) disorders. In February 1997, Conceptus received
510(k) clearance for its Resectoscope Safety Sheath in urology applications.
The Company is in the process of finalizing the material composition of its
S/TOP device. The use of certain materials may require that the device be
evaluated as a drug rather than as a device, and thus the FDA's IND and NDA
regulations would be applicable to the clinical study and commercialization of
the product. Otherwise the product will be treated as a medical device and
require an IDE and a PMA. The steps required before a drug may be marketed in
the United States include preclinical and laboratory tests, the submission to
the FDA of an application for an IND which must become effective before clinical
trials may commence, adequate and well controlled clinical trials to establish
the safety and efficacy of the drug, the submission to the FDA of an NDA, and
FDA approval of the NDA prior to any commercial sale or shipment of the product.
In November 1995, the Company met with the appropriate sections of both the
Office of Device Evaluation and the Office of Drug Evaluation of the FDA to
discuss their respective new product approval requirements. Based upon the
information obtained during these meetings, the Company does not believe that
there would be a material difference in the regulatory requirements nor the
product approval review cycle times between the drug and device regulatory
groups within the FDA.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMA or NDA approvals to market its products for the
intended uses on a timely basis, if at all, and delays in receipt of or failure
to receive such clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, regulatory clearances,
if granted, may include significant limitations on the indicated uses for which
a product may be marketed.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the CDHS and to list its products with
the FDA. As such, the Company will be periodically inspected by both the FDA and
CDHS for compliance with GMP and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner. In July 1994, the Company's San Carlos facility was
inspected by the CDHS with no observations, and the Company was subsequently
granted a California medical device manufacturing license. In February 1997, the
Company's San Carlos facility was inspected by the CDHS with only one
observation, and has been recommended for a California drug manufacturing
license. In March 1997, the Company was inspected by the FDA, and is in
substantial compliance with all FDA requirements including FDA GMP for medical
devices.
The Company is required to provide information to the FDA on death or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. In addition, the FDA
strictly prohibits the marketing of approved devices for uses other than those
specifically cleared for marketing by the FDA. If the FDA believes that a
company is not in compliance with the law or regulations, it can
23
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The promotion of most products regulated by the FDA is subject to both FDA
and Federal Trade Commission jurisdiction. The Company is also subject to
regulation by the Occupational Safety and Health Administration and by other
government entities.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business, financial condition or results of operations.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the Company's products may be marketed. In addition, in
order for companies to obtain such approvals, the FDA and certain foreign
regulatory authorities impose numerous additional requirements with which
medical device manufacturers must comply. FDA enforcement policy strictly
prohibits the promotion of approved medical devices for uses other than those
specifically cleared for marketing by the FDA. The Company will be required to
adhere to applicable FDA regulations regarding GMP and similar regulations in
other countries, which include testing, control, and documentation requirements.
Ongoing compliance with GMP and other applicable regulatory requirements will be
monitored through periodic inspections by federal and state agencies, including
the FDA and the CDHS, and by comparable agencies in other countries. Failure to
comply with applicable regulatory requirements, could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of approvals and criminal prosecution. Changes in existing
regulations or adoption of new government regulations or policies could prevent
or delay regulatory approval of the Company's products.
INTERNATIONAL
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ significantly from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than
regulations in the United States permit. Other countries, such as Japan, have
requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in others.
The European Union has promulgated rules which require that medical products
receive by mid-1998 the right to affix the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
Union Medical Device Directives. The ISO 9000 series of standards for quality
operations have been developed to ensure that companies know the standards of
quality to which they must adhere to receive European Union certification. ISO
9000 certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in member countries of the European Union after mid-1998. The
Company is in the process of developing and implementing policies and procedures
that are intended to allow the Company to receive ISO 9000 qualification of its
processes in 1997. There can be no assurance that the Company will be successful
in meeting certification requirements. Many countries in which the Company
currently operates or intends to operate either do not currently regulate
medical devices or have minimal registration requirements; however, these
countries may develop more extensive regulations in the future that could
adversely affect the Company's ability to market its products. In addition,
significant costs and requests by regulators for additional information may be
encountered by the Company in its
24
efforts to obtain regulatory approvals. Any such events could substantially
delay or preclude the Company from marketing its products in the United States
or internationally.
Export sales of investigational PMA devices or devices not cleared for
commercial distribution in the United States to certain countries are subject to
FDA export permit requirements. In order to obtain such a permit, the Company
must provide the FDA with documentation from the medical device regulatory
authority of the country in which the purchaser is located, stating that the
sale of the device is not a violation of that country's medical device laws.
Recent regulations eliminate export approval requirements for investigational
devices subject to an approved IDE which are being imported into certain
countries.
THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third-party payors, such as
private health insurance plans, to reimburse all or part of the costs associated
with the treatment of patients.
The Company's success will depend upon, among other things, its ability to
obtain satisfactory reimbursement from healthcare payors for its products. It is
also anticipated that the Company's Hysteroscopy system products will be covered
within the hysteroscopy procedure reimbursement codes. Reimbursement in the
United States for the Company's tubal catheterization products is currently
available from most third-party payors, including most major private health care
insurance plans and Medicaid, under existing procedure codes. Although
reimbursement for catheterization procedures has generally been available in the
United States, there can be no assurance that this will continue to be the case.
The Company does not expect that third-party reimbursement in the United States
will be available for use of its other products unless and until FDA clearance
or approval is received. There can be no assurance, even if the Company's
products are cleared by the FDA for new clinical applications, that full
reimbursement will be available for such procedures. If FDA clearance or
approval is received, third-party reimbursement for these products will be
dependent upon decisions by individual health maintenance organizations, private
insurers and other payors. However, the Company believes that procedures using
its STARRT system may be reimbursed in the United States under existing
procedure codes for diagnosis and re-establishment of patency of the fallopian
tubes and, if applicable, for related interpretation of such procedures.
However, there can be no assurance that such procedure codes will remain
available or that the reimbursement under these codes will be adequate. Given
the efforts to control and decrease health care costs in recent years, there can
be no assurance that any reimbursement will be sufficient to permit the Company
to achieve or maintain profitability. The Company could also be adversely
affected by changes in reimbursement policies of government or private
healthcare payors, particularly to the extent that any such changes affect
reimbursement for therapeutic or diagnostic catheterization procedures in which
the Company's products are used. Failure by physicians, hospitals and other
users of the Company's products to obtain sufficient reimbursement from
healthcare payors for procedures in which the Company's products are used, or
adverse changes in government and private third party payors' policies toward
reimbursement for such procedures, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Market acceptance of the Company's products in international markets may be
dependent in part upon the availability of reimbursement within prevailing
healthcare payment systems. Reimbursement systems in international markets vary
significantly by country, and by region within some countries, and reimbursement
approvals must be obtained on a country-by-country basis. Many international
markets have government managed health care systems that govern reimbursement
for new devices and procedures. In most markets, there are private insurance
systems as well as government-managed systems. As in the United States, the
Company expects that Hysteroscopy system products will be covered within the
hysteroscopy procedure reimbursement framework. Large-scale market acceptance of
the Company's tubal catheterization, falloposcopy, sterilization and other
products will depend on the availability and level of reimbursement in
international markets targeted by the Company. Currently, the Company has been
25
informed by its international distributors that the tubal catheterization system
has been approved for reimbursement in countries in which the Company markets
its products. The Company's falloposcopy system has been approved for
reimbursement only in Australia. Obtaining reimbursement approvals can require
12 to 18 months or longer. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
amount, or at all. Failure to obtain such approvals could have a material
adverse effect on market acceptance of the Company's products in the
international markets in which the Company is seeking approvals and could have a
material adverse effect on the Company's sales, business, financial condition
and results of operations.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of its products will be required to obtain reimbursement.
Availability of reimbursement will depend on the clinical efficacy and cost of
the Company's systems. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either government or private reimbursement systems, or that
physicians will support and advocate reimbursement for use of the Company's
systems for all indications intended by the Company. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors or adverse changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
In the infertility area, the Company believes its primary current
competition to be existing methods for diagnosing and treating diseases and
disorders of the fallopian tubes. Accordingly, the Company competes with
manufacturers of products that are used in other methods for diagnosing and
treating tubal diseases and disorders, such as manufacturers of laparoscopic and
hysteroscopic devices and other products that provide more invasive access to
the fallopian tubes. The Company also competes with certain other companies that
manufacture catheters and guidewires for tubal catheterization, and
falloposcopic devices. Additionally, certain smaller companies are developing
alternative catheter-based systems for the diagnosis and treatment of female
reproductive disorders that may compete directly with the Company's systems.
In the therapeutic hysteroscopy area, there are four major endoscope
companies (Storz, Olympus, Circon, and Wolf) that account for the majority of
sales of the equipment and instruments used to perform these procedures.
Although the Company has what it believes to be significant intellectual
property protection for its products, there can be no assurance that these
companies or others (e.g. electrosurgical generator manufacturers) will not
develop technology to enable electrosurgical therapeutic hysteroscopy to be
performed with isotonic solution. The major endoscope companies and others also
market cutting loops and coagulating roller balls which would be directly
competitive with those manufactured and marketed by the Company. There are also
a number of companies developing devices to perform endometrial ablation using
different energy sources. There are also a number of companies developing and
selling devices to perform fibroid resections using a variety of energy sources,
which would be competitive with the Company's morcellator device.
The Company believes that its products have distinct advantages over those
of its competitors based on the Company's advanced proprietary micro-catheter
and guidewire technologies and its proprietary resectoscope safety sheath
technology. However, many of the Company's competitors have substantially
greater name recognition and financial resources than the Company and have
greater resources and expertise in research and development, obtaining
regulatory approvals, manufacturing and marketing. Certain of these companies
are developing and marketing devices for the diagnosis and treatment of
disorders of the female reproductive system and others may choose to enter this
market at a later date.
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There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective or less costly than
those developed by the Company or that would render the Company's products
obsolete or noncompetitive. Additionally, there can be no assurance that the
Company will be able to compete effectively against such competitors based on
its abilities to manufacture, market and sell its products.
The Company expects competition to increase in the emerging market for
devices designed to diagnose and treat reproductive disorders. As the Company
commercializes its S/TOP system, it expects to compete against surgical
procedures for permanent contraception, mechanical devices and other
contraceptive methods. The Company also competes with other companies for
clinical sites to conduct trials. The Company believes that the primary
competitive factors in the market for tubal catheterization, falloposcopy and
hysteroscopy products are safety, efficacy, ease of use, reliability,
cost-effectiveness, degree of invasiveness, patient recovery time, absence of
significant side effects, availability of third-party reimbursement, and
physician and public awareness of the existence and efficacy of products. The
medical device industry is characterized by rapid and significant technological
change. The length of time required for product development and regulatory
approval plays an important role in a company's competitive position.
Consequently, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
commercialization of new products. Product development involves a high degree of
risk and there can be no assurance that the Company's research and development
efforts will result in commercially successful products. The Company believes
that it competes favorably with respect to these factors, although there can be
no assurance that it will continue to do so and that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves an inherent risk of exposure to product
liability claims and product recalls. Although the Company has not experienced
any product liability claims to date, there can be no assurance that the Company
will be able to avoid significant product liability claims and potential related
adverse publicity. The Company currently maintains product liability insurance
with coverage limits of $4,000,000 per occurrence and an annual aggregate
maximum of $4,000,000, which the Company believes is comparable to that
maintained by other companies of similar size serving similar markets. However,
there can be no assurance that product liability claims in connection with
clinical trials or sale of the Company's products will not exceed such insurance
coverage limits, which could have a material adverse effect on the Company, or
that such insurance will continue to be available on commercially reasonable
terms, or at all. In addition, the Company may require increased product
liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of March 1, 1997, the Company employed 62 individuals, 24 of whom were
engaged directly in research, development, regulatory and quality assurance
affairs, 9 in manufacturing and 29 in marketing, sales and administrative
positions. The Company also contracts with outside consultants. None of the
Company's employees is covered by a collective bargaining agreement. Conceptus
believes that it maintains good relations with its employees. The Company is
dependent upon a number of key management and technical personnel. The loss of
the services of one or more key employees could have a material adverse effect
on the Company's business financial condition and results of operations. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management and technical personnel. The Company
faces intense competition for qualified personnel, many of whom are
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often subject to competing employment offers, and there can be no assurance that
the Company will be able to attract and retain such personnel. Furthermore, the
Company relies on the services of several medical and scientific consultants,
all of whom are employed on a full-time basis by hospitals or academic or
research institutions. Such consultants are therefore not available to devote
their full time or attention to the Company's affairs.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of February 28,
1997, are